Early Contractor Involvement in the Hong Kong edition of the New Engineering Contract (NEC)

As a result of continuous innovation in construction technologies and the ever-changing regulatory landscape, the design of infrastructure and buildings have become increasingly complex. Effective delivery of a complex construction project demands for maximum buildability performance.

In the “Construction 2.0 – Time to change” report published in September 2018 by the Development Bureau of the Hong Kong SAR, Early Contractor Involvement (ECI) was singled out as a preferred approach to enhance buildability and assist in lowering cost whilst still ensuring visual appeal and effective function is maintained. Following the successful pilot public works projects with the adoption of ECI, it came as no surprise that the Hong Kong Edition of the NEC Engineering and Construction Contract (ECC) published in July 2023 included Hong Kong-specific amendments to option X22 - ECI.

ECI is a two-stage procurement approach. It allows the contractor to be engaged at stage one (the pre-construction stage) to offer input in the design, develop plans and identify/mitigate risks together with the client or client's consultant team. The project is then constructed and delivered in stage two of the contract (the construction stage).

In this article, we will explore the mechanism of option X22 in the Hong Kong Edition of the NEC EEC and how it could achieve costs saving and minimise design risk.

 

Budget and incentive

First and foremost, the client is required to set the budget for the project (clause X22.1(2)). This is the client's costs of complete delivery of the project and not just what is paid to the contractor for construction. This may include costs of feasibility studies, application of permits and investigation works, as well as other miscellaneous works to be carried in stage one such as temporary traffic arrangements. Certain events, such as changes to the client's scope, may give rise to changes to the budget (clause X22.6(1)).

During stage one, the contractor is required to provide regular cost forecasts at the agreed intervals for the work to be done in stage one for acceptance by the Project Manager (clause X22.2(1)). Any costs not included in the accepted forecast will be disallowed (clause X22.2(4)). This gives cost certainty to the client and protects the contractor from incurring costs for works out of the scope or not necessary for stage one.

During stage one and stage two, the contractor is required to prepare forecasts of the Project Cost in consultation with the Project Manager (clause X22.2(5)). If the final Project Cost on completion of the works is less than the budget, an agreed financial incentive is paid to the contractor (clause X22.7).

Under ECC Option C contract, the contractor is further incentivised to seek costs savings so that the actual cost is below the target cost. This entitles the contractor to get a gain share based on the difference between the final total of the Prices (as adjusted throughout the contract term) and the Price for Work Done to Date. Separately, it is not uncommon for the client to provide additional financial incentive for early completion under option X20 – Key Performance Indicators.

 

Development of design and scope

At the end of stage one, the contractor is required to submit (in consultation with the Project Manager) its proposals for stage two, a revised programme, any revisions to the Access Dates, Key Date, the Completion Date, and the total of the Prices or any changes to the total of the Prices in accordance with the submission procedure stated in the Scope (clause X.22.3(1) and (2)). The client's consultants may prepare an evaluation report setting out reasons for accepting or not accepting the contractor's submission. There are provisions to guide the contractor to make a revised submission if the submission is not accepted by the Project Manager (clause X22.3(3) and (4)).

It allows the client to benefit from the contractor's technical resources, experience and expertise to identify buildability issues, develop the optimum design and adopt innovation and technology. A relevant example is the adoption of modular integrated construction (MiC) technology to pre-fabricate integrated modules in a factory before installation on-site.

Furthermore, the Project Manager and contractor may agree to change the Site Information during stage one (clause X22.3(7)). Getting the Site Information right is important as it forms the basis of the assessment of a compensation event (clause 60.2). It allows information obtained during stage one to be included in the Site Information, for example the results of a site survey and ground investigation that may not be available to the client during the tender stage. Additionally, the Project Manager is required to give an instruction to the contractor to change the Scope if the client wishes to adopt any of the stage one contractor's proposals as a client's requirement (clause 14.3).

 

Proceed to stage two (or not)

At the end of stage one the Project Manager is required to issue either a notice to proceed to stage two or a notice that works will not proceed to stage two (clause X22.5(1)).

If the client decides not to proceed, the Project Manager is required to issue an instruction that the work in stage two is removed from the Scope and change the Completion Date to the date of completion of stage one (clause X22.5(5)). This clarifies the parties' rights as it distinguishes the decision not to proceed to stage two from termination of the contract and a compensation event. Additionally, there is an option for the client to appoint another contractor to complete the stage two works (clause X22.5(6)).

 

Key Takeaway

Option X22 in the Hong Kong Edition of the NEC EEC provides the first jurisdiction-specific ECI provisions for the Hong Kong market. It offers a seamless transition from the pre-construction stage to construction stage and allows the client, Project Manager and the contractor to work collaboratively under a well-defined framework, to achieve costs saving and reduce design risks. It has the added benefit of avoiding the need to enter into a separate contract upon completion of the design stage as required by the Pre-Construction Services Agreement (PCSA) model.

Please contact May Ng (Partner) or Marcus Wong (Associate) if you have any questions or would like to discuss this article further.